RAY SUAREZ: Now, how a group of corporate leaders see recent events. Our business correspondent Paul Solman of WGBH in Boston has that.

PAUL SOLMAN: Joining us from New York is Pete Peterson, chairman of the Blackstone Group, a private investment banking firm, co-chairman of the corporate governance task force at the Conference Board and former Secretary of Commerce during the Nixon Administration. From Denver, William George, until recently the CEO at Medtronic, a multibillion dollar medical technology firm. And with me here in Boston, Richard Syron, CEO of Thermo Electron, manufacturer of scientific center instruments. He is the former CEO of the American Stock Exchange. And welcome to you all.

PAUL SOLMAN: Okay. Pete Peterson, let’s start with a question that is becoming almost a cliche. Are we looking at a few bad apples, or a rotting orchard?

PETER PETERSON: Well, you know, it’s very soothing cliche, and it comforts us businessmen to believe that, and I believed it for sometime. But I’ve got to tell you a couple things about that.

PAUL SOLMAN: You mean you believed that it was a few bad apples?

PETER PETERSON: Yeah. I kind of believed that until recently; however, there’s certainly more bad apples already than I would have guessed. Second, I don’t know how we answer that question accurately because how would we really know how many bad apples there are? And besides, with the total breakdown in public confidence, I don’t think it matters very much what we businessmen think about ourselves. What matters is what the public thinks, because their public trust is what’s really crashed. And I brought with me a survey that I just read this morning that is very melancholy, and it makes me sad and perhaps even a little ashamed.

They asked several hundred voters, I mean, ordinary people, which comes closest to your thoughts about these instances of corporate wrongdoing? One was every company does this kind of thing but only a few will get caught; 43 percent believe that.

PAUL SOLMAN: That every company does it.

PETER PETERSON: The second one is many other companies will be exposed; 36 percent believe that. I guess the bad apple theory that we soothe ourselves with, these are isolated instances. Only 15 percent of the Americans believe that. So whatever we may think, obviously most voters believe that this is somewhat of an orchard. And that says to me that we’ve got what I call a moral cancer or governance cancer and it’s going to metastasize if we don’t cut out this thing in a hurry or as soon as we can into an economic cancer. So that would be my answer to that question.

PAUL SOLMAN: Bill George, you’re a CEO, you’re on boards I assume. You know other CEO’s. Are you guys to blame and is it as pervasive as the public seems to think it is?

WILLIAM GEORGE: Well, I think Pete is on the right point. We have a real loss of investor trust and it is not just American. It’s worldwide. I saw a survey in Wall Street Journal Europe that only 21 percent of the Europeans think CEOS are honest. I found that pretty shocking. And so to say we are going to solve this by putting a few of the crooks in jail, I think it really misses the broader point here.

We in the business community really need to step up to our responsibility in terms of governance and leadership, and we have a huge vacuum and you don’t hear a lot of business leaders criticizing what is going on and you have the some great companies in the last few days that have come out with multibillion dollar reversals in their accounting. So it is not just three or four bad companies who have destroyed a lot of shareholder value. So I think we need to move on a much broader front than just trying to extend jail terms for criminals and to strengthen our systems of governance.

I’m afraid it is going to take the combined effort on the part of the New York Stock Exchange, SEC, but also corporate boards. I’ve served on I think nine boards over the years. And they’ve been very good boards but I feel somehow our boards have not done the job in terms of governance and separating their role from management and have really conceded too much of the power to the CEO’s, and you see the extreme excesses of what is really a lot of greed in our system, greed on the investment side, obviously greed on the accounting side and greed on the corporate side. I think we have to face into that issue.

PAUL SOLMAN: We’ll get to policy in a minute. Dick Syron, when you run into a CEO now, and you must have known a lot of them when you were running the American Stock Exchange, do you secretly think, gee, what were they doing that I didn’t know about? I mean do you trust your former colleagues or associates less?

RICHARD SYRON: Well, you know, it’s become the mantra to say that we’re all ticked off, whether it was a few bad apples or was more systemic. But I think there is a lot of anger by a lot of us in terms of what has happened. And we, it comes back to what Bill and Pete both said, have more of an interest than anyone else in a lot of ways of seeing this thing cleaned up. I was joking with someone. You get on a plane with someone, they ask what you do, I’m tempted to say sell paint – not that I’m a CEO of a company. But I think that we have to recognize that some of this is a result of putting in place incentives that brought about results that may have been totally at variance than their intended consequences.

PAUL SOLMAN: That’s the next question I was going to ask you. Why in a sense should we be so surprised? I mean, I can understand how we’re sort outraged, you know, when we see the consequences of what’s been going on. But weren’t the incentives fairly clear and growing for a CEO to get, to manipulate, if you will, the stock of the company, to get as much for him or herself as possible, while the disincentives, the punishments were going away?

RICHARD SYRON: Well, I think that is unfortunately true. But I think it holds true on a number of dimensions. One, we probably under-funded the SEC for a period of time. We didn’t sufficiently respect the people who worked there or pay them as well as the people who were being paid to deal with the issues on the other side.

PAUL SOLMAN: That’s right. The other government investigators didn’t get paid– they got paid more than the SEC people got paid.

RICHARD SYRON: Exactly.

PAUL SOLMAN: The President has now suggested we release, we at least hire more SEC People.

RICHARD SYRON: I think also we had the situation on the options side, and options in my view were too short-term; that people were rewarded if the stock went up. You didn’t lose very much if it went down.

PAUL SOLMAN: That was the CEO having the option to buy the stock at a low price.

RICHARD SYRON: Well, at the current price, but being highly incented to the short-term performance of the stock. I think, Paul, this really is part of a broader economic problem. And I think Pete is right. If we are not careful, it is going to be a serious economic problem. But a broader economic problem of short-term orientation we have in everything. As long as you incent CEOs on the basis that boy, if you are expected to make 92 cents this quarter, it better be 93 and 94, and if it is 91, it’s a disaster and you won’t be compensated one way or the other, you know, Pogo is right, we’ve met the enemy and it’s us.

PAUL SOLMAN: Pete Peterson, do you agree with that? Weren’t the incentives there? I mean, why should you be so surprised?

PETER PETERSON: Well, I agree that we in business had better look in the mirror here. And I imagine for the moment that instead of us guys engaging in self-serving soothing declarations, we look at what’s going on here from the standpoint of the public. Incidentally, another statistic I read that really made me sad, I always thought politicians were at the bottom of the pile. It now turns out that the voter thinks of politicians more favorably than us. And how much more insulting can you get than that?

PAUL SOLMAN: Journalists are finally moving up.

PETER PETERSON: Let’s review the record as they say, as the public probably sees it. I read a Business Week article in which they pointed out that 20 years ago the CEO got about 40 times what the average worker did. It’s now, according to them, 541 times. They point out that the earnings of CEO’s have grown ten times faster than the average worker. They pick up the paper and hear guys that ruin companies, who made hundreds of millions of dollars. Other guys who cashed in options then the company goes bankrupt. So why should we be surprised that there’s a distrust here? And I agree entirely with Bill and I’m trying to look in the mirror in this commission. We’d better start looking at ourselves because the blunt and melancholy truth is we have not been showing much leadership.

For example, we know in our heart of hearts that executive compensation is one of the critical issues that’s on the minds of the people. Now what are we talking about? We’re talking about stock options that have doubled. We’re talking about loans in egregious amounts for people to buy options. We are talking about repricing options. We say to people we’re aligning interests with the stockholder. If I were a stockholder and looking us in the eye, what would I be saying? I’d say In the first place you guys don’t have to exercise those options unless you know, the price is up. And the second place, you can turn around and sell them in a hurry as Bill pointed out. And in the third place, nobody is offering me any loans.

So there are some tough questions here about how we account for options. We don’t want to think about it, but we’re taking massive deductions on our income statement. I read in the paper yesterday that Enron got $625 million check from the government. Bill’s right about the long term here. Should we be extending the holding periods, for example?

PAUL SOLMAN: Well, let’s talk about some of the specific proposals. Bill George, you raised this issue before. President Bush has put on the table a number of proposals, the Senate has what are spoken of or written of as tougher proposals. What do you see out there that you like? Do you think that President Bush’s proposals to start with, are going to make a significant difference in changing the moral tone and behavior of CEO’s in America?

WILLIAM GEORGE: I don’t think he’s gone nearly far enough. It’s a little bit like putting a bad lock on the stable door after the robbers took our horses. Pete is on the right issues. We need to stop all these things he is talking about. Actually, going back to stock options, I thought they were a very good long-term incentive. We had 10-year stock options at Medtronic. I never cashed any of them in until the last day; I never sold any stock except to pay the taxes on the option gains.

PAUL SOLMAN: That’s because they aligned your interests supposedly with the interest of the shareholders.

WILLIAM GEORGE: Right.

PAUL SOLMAN: If you owned the company, then you wouldn’t be incentivized to run it for your own personal profit, right?

WILLIAM GEORGE: Exactly. I think what happened is too much of a good thing. We got greedy and we’re killing the goose that laid the golden egg. Now I think we are going to have to face the issue of the value of the stock options. And what personally I would like to see is and the Stock Exchange Committee has come out and said they would like to see all options approved by shareholders. We’ve always done that at Medtronic. I think they should be. It’s the shareholders shares we are giving away. Second, I think we’re going to have to look at the value.

Personally I don’t like theoretical calculations about the value of stock options. I would much prefer us to say, when you take the gain, if I get a $5 million gain out of stock option, at the time I take the gain, that’s a taxable event, that’s the time that the company should record a gain because there is a real gain there. And I think that would equate stock options more with stock grants, restricted stock, cash bonuses and other forms of compensation and put everything on the same level playing field. And then we, boards and shareholders would have to look seriously at those issues and see did the shareholders get the real gain?

PAUL SOLMAN: Okay. Dick Syron, quickly on stock options and also what about tougher jail sentences, which is part of what President Bush was talking about with regard to people who commit fraud?

RICHARD SYRON: Well, I think there is probably value to tougher jail sentences talking about what Pete Peterson said. And some of these people should and I hope do go to jail.

PAUL SOLMAN: Do you think they will?

RICHARD SYRON: I fear that many won’t. And I think to get back public confidence, we probably do need to have some people go to jail. And I think that will be something that will tend to bolster public confidence.

PAUL SOLMAN: I just want to ask quickly to just a very short question to each of you. Do you think, Pete Peterson, that CEO’s will go to jail?

PETER PETERSON: Well, why don’t we look at what’s actually happened instead of my opinion. The Enron case has been around since what, October?

PAUL SOLMAN: Yeah.

PETER PETERSON: And we’ve read of some egregious circumstances earlier than October. And nothing has happened in eight or nine months. Now in my view, had it happened, had some guys gone to jail on the assumption that there is fraudulent behavior, I think it would have helped.

PAUL SOLMAN: Do you think things are actually going to change? Is the system, because of the outrage that we are hearing, going to adjust, Bill George?

WILLIAM GEORGE: I think it has to change. We have no choice in the business community. And I think we need to start cleaning up our own house by getting a separation of our board governance from the management and cleaning up the governance, getting more than 50 percent independent directors and having the board really take responsibility. We can put people in jail but that’s not going to solve a problem. I think the only way we are going to restore confidence of the investors, if they can see that corporations are taking things in their own hand to govern well and to produce not meeting analysts expectations – that’s been part of the problem — but to produce strong long-term results that reward them for their investments and that we are good financial stewards of their investments.

RICHARD SYRON: It’s already changing and I think it is already changing because of all the attention that has been brought to this. I think that people, I suspect, I don’t know, I haven’t talked to a lot about this, looking at these things on a day-to-day basis, hopefully differently than they did a year ago.

PAUL SOLMAN: Dick Syron, thank you very much. Thank you all. Appreciate it. We are out of time.

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